SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10 - QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-16120
SECURITY FEDERAL CORPORATION
Delaware 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1705 Whiskey Road, Aiken, South Carolina 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
Class Outstanding Shares at
Common Stock December 31, 1997
$0.01 Par Value 421,060
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INDEX
SECURITY FEDERAL CORPORATION
PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at
December 31, 1997 and March 31, 1997 2
Consolidated Statements of Income for the
Three months ended December 31, 1997 and 1996 3-4
Nine months ended December 31, 1997 and 1996 5-6
Consolidated Statement of Shareholders' Equity 7
Consolidated Statements of Cash Flows 8-9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis
Financial Condition and Results of Operations 14-19
PART II. OTHER INFORMATION
Other Information 20
Signatures 21
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
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Security Federal Corporation and Subsidiary
Consolidated Balance Sheets (Unaudited)
December 31, 1997 March 31, 1997
Assets ----------------- --------------
Cash and cash equivalents $ 6,816,956 $ 7,903,637
Investment and mortgage-
backed securities:
Available for sale:
(Amortized cost of $57,401,209 57,471,500 24,215,667
at December 31, 1997 and
$24,484,644 at March 31, 1997)
Held to maturity: (Fair value 9,484,274 12,754,769
of $9,562,841 at December 31,
1997 and $12,598,186 at March
31, 1997)
Loans receivable net:
Held for sale 639,616 211,212
Held for investment: (Net of
allowance of $1,921,942 at
December 31, 1997 and
$1,767,483 at March 31, 1997) 139,833,763 146,558,261
------------ ------------
140,473,379 146,769,473
------------ ------------
Accrued interest receivable:
Loans 822,031 820,730
Mortgage-backed securities 26,873 38,909
Investments 867,569 363,109
Premises and equipment, net 3,901,278 3,952,149
Federal Home Loan Bank stock, at cost 1,480,900 785,700
Real estate acquired in settlement of
loans 62,535 52,009
Real estate held for development and sale 779,191 840,813
Other assets 2,918,169 3,148,980
------------ ------------
Total Assets 225,104,655 201,645,945
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $176,528,779 $168,060,858
Advances from Federal Home Loan Bank 28,268,000 14,114,000
Other borrowed money 154,583 204,397
Advance payments by borrowers
for taxes and insurance 167,908 244,449
Other liabilities 2,300,862 2,840,212
------------ ------------
Total liabilities 207,420,132 185,463,916
------------ ------------
Stockholders' Equity:
Serial preferred stock, $.01 par
value; authorized shares - 200,000
issued and outstanding, none
Common stock, $.01 par value;
authorized shares 1,000,000
issued and outstanding shares,
421,060 at December 31, 1997 and
417,122 at March 31, 1997 4,211 4,171
Additional paid-in capital 3,997,943 3,958,603
Unrealized net gain (loss) on
securities available for sale,
net of income taxes 47,612 (166,872)
Retained earnings, substantially
restricted 13,634,757 12,386,127
------------ ------------
Total stockholders' equity 17,684,523 16,182,029
Total liabilities and stockholders' ------------ ------------
equity $225,104,655 $201,645,945
============ ============
See accompanying notes to consolidated financial statements.
2
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Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Three Months Ended
December 31,
------------
1997 1996
---- ----
Interest income:
Loans $ 3,345,475 $ 3,417,262
Mortgage-backed securities 81,655 82,907
Investment securities 911,362 460,793
Other 16,645 19,558
-------------- -------------
Total interest income 4,355,137 3,980,520
-------------- -------------
Interest expense:
NOW and money market accounts 375,940 232,417
Passbook accounts 74,850 80,150
Certificate accounts 1,342,215 1,319,242
Advances and other borrowed money 393,073 276,129
-------------- -------------
Total interest expense 2,186,078 1,907,938
-------------- -------------
Net interest income 2,169,059 2,072,582
Provision for loan losses 240,000 75,000
Net interest income after provision for -------------- -------------
Loan losses 1,929,059 1,997,582
-------------- -------------
Other income:
Net gain on sale of investments 15,423 0
Gain on sale of loans 47,203 86,711
Loan servicing fees 86,139 83,275
Service fees on deposit accounts 224,681 218,299
Income (loss) from real estate operations 6,741 29,344
Other 93,347 71,516
-------------- -------------
Total other income 473,534 489,145
-------------- -------------
General and administrative expenses:
Salaries and employee benefits 866,318 790,850
Occupancy 116,832 102,467
Advertising 86,488 56,644
Depreciation and maintenance of equipment 171,781 154,727
FDIC insurance premiums 18,848 65,558
Amortization of intangibles 116,310 116,310
Other 316,510 489,366
-------------- -------------
Total general and administrative expenses 1,693,087 1,775,922
-------------- -------------
(Continued)
3
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Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Three Months Ended
December 31,
------------
1997 1996
---- ----
Income before income taxes 709,506 710,805
Provision for income taxes 240,622 253,907
-------------- -------------
Net income $ 468,884 $ 456,898
============== =============
Basic net income per common share $ 1.12 $ 1.10
============== =============
Diluted net income per common share $ 1.11 $ 1.09
============== =============
Cash dividend per share on common stock $ 0.06 $ 0.05
============== =============
Basic weighted average shares outstanding 419,861 415,910
============== =============
Diluted weighted average shares outstanding 421,086 418,502
============== =============
See accompanying notes to consolidated financial statements.
4
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Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Nine Months Ended
December 31,
------------
1997 1996
---- ----
Interest income:
Loans $ 10,008,676 $ 10,198,326
Mortgage-backed securities 249,661 261,804
Investment securities 2,108,669 1,501,907
Other 54,722 56,530
-------------- -------------
Total interest income 12,421,728 12,018,567
-------------- -------------
Interest expense:
NOW and money market accounts 869,519 701,856
Passbook accounts 226,673 255,961
Certificate accounts 3,873,926 4,096,186
Advances and other borrowed money 922,953 941,985
-------------- -------------
Total interest expense 5,893,071 5,995,988
-------------- -------------
Net interest income 6,528,657 6,022,579
Provision for loan losses 630,000 225,000
Net interest income after provision for -------------- -------------
Loan losses 5,898,657 5,797,579
-------------- -------------
Other income:
Net gain on sale of investments 15,423 0
Gain on sale of loans 149,288 161,923
Loan servicing fees 259,539 251,348
Service fees on deposit accounts 659,452 608,547
Income (loss) from real estate operations 53,656 (14,296)
Other 338,267 135,353
-------------- -------------
Total other income 1,475,625 1,142,875
-------------- -------------
General and administrative expenses:
Salaries and employee benefits 2,597,105 2,421,701
Occupancy 353,904 302,071
Advertising 272,486 147,163
Depreciation and maintenance of equipment 548,246 482,426
FDIC insurance premiums 57,440 223,902
FDIC SAIF Assessment 0 705,489
Amortization of intangibles 348,930 348,930
Other 1,163,618 1,476,231
-------------- -------------
Total general and administrative expenses 5,341,729 6,107,913
-------------- -------------
(Continued)
5
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Security Federal Corporation and Subsidiary
Consolidated Statements of Income (Unaudited)
Nine Months Ended
December 31,
------------
1997 1996
---- ----
Income before income taxes 2,032,553 832,541
Provision for income taxes 708,605 274,278
-------------- -------------
Net income $ 1,323,948 $ 558,263
============== =============
Basic net income per common share $ 3.17 $ 1.35
============== =============
Diluted net income per common share $ 3.16 $ 1.34
============== =============
Cash dividend per share on common stock $ 0.18 $ 0.15
============== =============
Basic weighted average shares outstanding 418,038 414,099
============== =============
Diluted weighted average shares outstanding 419,263 416,662
============== =============
See accompanying notes to consolidated financial statements.
6
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Security Federal Corporation and Subsidiary
Consolidated Statement of Shareholders' Equity
For the nine months ended December 31, 1997
(Unaudited)
Unrealized
Net Gain
(Loss)
Additional on Securities
Common Paid-In Available Retained
Stock Capital For Sale Earnings Total
----------------------------------------------------------
Beginning balance
March 31, 1997 $4,171 $3,958,603 $(166,872) $12,386,127 $16,182,029
Net income -- -- -- 1,323,948 1,323,948
Cash dividend -- -- -- (75,318) (75,318)
Exercise of stock
options 40 39,340 -- -- 39,380
Decrease in unrealized
net loss/increase in
unrealized net gain
on securities available
for sale, net of tax -- -- 214,484 -- 214,484
--------------------------------------------------------
Ending balance
December 31, 1997 $4,211 $3,997,943 $ 47,612 $13,634,757 $17,684,523
========================================================
See accompanying notes to consolidated financial statements.
7
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Security Federal Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
December 31,
------------
1997 1996
---- ----
Cash flows from operating activities:
Net Income $ 1,323,948 $ 558,263
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation expense 475,259 448,337
Amortization of purchase accounting
adjustments 348,930 348,930
Discount accretion and premium amortization (21,808) 130,043
Provisions for losses on loans and real estate 630,000 325,000
Gain on sale of investments (15,423) 0
Gain on sale of loans (149,288) (161,923)
Gain on sale of real estate (99,418) (36,497)
Amortization of deferred fees on loans (79,042) (87,512)
Proceeds from sale of loans held for sale 8,042,373 10,657,313
Origination of loans for sale (8,321,489) (10,186,397)
(Increase) decrease in accrued interest
receivable:
Loans (1,301) (41,346)
Mortgage-backed securities 12,036 (16,678)
Investments (504,460) 36,721
Decrease in advance payments by borrowers (76,541) (267,804)
Other, net (774,163) (858,110)
-------------- -------------
Net cash provided by operating activities $ 789,613 $ 848,340
Cash flows from investing activities -------------- -------------
Principal repayments on mortgage-backed
securities 275,692 394,006
Proceeds from sale of investment securities
available for sale 2,982,969 0
Purchase of investment securities available
for sale (45,367,500) (2,973,203)
Maturities of investment securities available
for sale 9,500,000 15,500,000
Purchase of investment securities held to
maturity 0 (6,471,992)
Maturities of investment securities held to
maturity 3,000,000 3,000,000
Purchase of FHLB Stock (695,200) (11,500)
Redemption of FHLB Stock 0 72,000
Decrease in loans to customers 6,012,303 113,423
Investment in real estate held for development (159,442) (478,018)
Proceeds from sale of real estate held for
development 274,720 811,972
Proceeds from sale of real estate acquired
through foreclosure 218,184 616,619
Purchase of premises and equipment (454,189) (740,584)
Net cash used (provided) by investing -------------- -------------
activities $ (24,412,463) $ 9,832,723
-------------- -------------
(Continued)
8
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Security Federal Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
Nine Months Ended
December 31,
------------
1997 1996
---- ----
Cash flows from financing activities:
Increase (decrease) in deposit accounts $ 8,467,921 $ (5,681,980)
Proceeds from FHLB advances 97,940,000 72,650,000
Repayment of FHLB advances (83,786,000) (79,586,000)
Repayment of other borrowings $ (49,814) (350,000)
Dividends to share holders (75,318) (62,173)
Exercise of stock options $ 39,380 39,380
Net cash provided (used) by financing -------------- -------------
activities $ 22,536,169 $ (12,990,773)
-------------- -------------
Net decrease in cash and cash equivalents (1,086,681) (2,309,710)
Cash and cash equivalents at beginning of
period 7,903,637 9,823,664
-------------- -------------
Cash and cash equivalents at end of period $ 6,816,956 $ 7,513,954
============== =============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 5,893,071 $ 6,268,267
Income taxes $ 816,500 $ 306,000
Additions to real estate acquired
through foreclosure $ 182,948 $ 246,126
Increase in unrealized net gain/
decrease in unrealized net loss on
securities available for sale,
net of taxes $ 214,484 $ 89,489
Securitization of loans receivable $ 0 $ 2,796,062
See accompanying notes to consolidated financial statements.
9
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and therefore do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations and cash flows in conformity with general accepted
accounting principles. Such statements are unaudited but, in the opinion of
management, reflect all adjustments, all of which are of a normal recurring
nature, necessary for a fair presentation of results for the selected interim
periods. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Annual Report to
Stockholders when reviewing interim financial statements. The results of
operations for the three and nine month periods ended December 31, 1997 are
not necessarily indicative of the results, which may be expected for the
entire fiscal year.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and its wholly owned
subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages
primarily in investment brokerage services. Also included in consolidation
are two real estate partnerships, which the Company purchased from SFSC in
December 1995 at fair market value.
3. Loans Receivable, Net
Loans receivable, net, at December 31, 1997 and March 31, 1997, consisted of
the following:
Loans held for sale were $639,616 and $211,212 at December 31, 1997 and March
31, 1997 respectively.
Loans held for investment: December 31, 1997 March 31, 1997
----------------- --------------
Residential real estate $ 45,703,979 $ 50,534,682
Consumer 46,874,036 46,894,063
Commercial real estate 4,174,488 6,527,692
Commercial business 47,892,034 46,047,825
----------------- --------------
$ 144,644,537 $ 150,004,262
================= ==============
Less:
Allowance for possible loan loss $ 1,921,942 $ 1,767,483
Loans in process 2,627,315 1,375,319
Deferred loan fees 261,517 303,199
----------------- --------------
4,810,774 3,446,001
----------------- --------------
$ 139,833,763 $ 146,558,261
================= ==============
The following is a reconciliation of the allowance for possible loan losses:
December 31, 1997 December 31, 1996
----------------- -----------------
Beginning balance $ 1,767,483 $ 1,758,688
Provision 630,000 225,000
Charge-offs (571,558) (258,404)
Recoveries 96,017 19,078
----------------- --------------
Ending balance $ 1,921,942 $ 1,744,362
================= ==============
10
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Securities
Investment and Mortgage-backed Securities, Available for Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains gross unrealized losses and market
values of investment and mortgage-backed securities available for sale are as
follows:
December 31, 1997
- -----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
US Government and
agency
Obligations $ 57,401,209 $ 166,283 $ 95,992 $ 57,471,500
Mortgage-backed
securities 0 0 0 0
------------ ------------ ------------ -------------
Total $ 57,401,209 $ 166,283 $ 95,992 $ 57,471,500
============ ============ ============ =============
March 31, 1997
- --------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
US Government and
agency
Obligations $ 24,484,644 $ 0 $ 268,977 $ 24,215,667
Mortgage-backed
securities 0 0 0 0
------------ ------------ ------------ -------------
Total $ 24,484,644 $ 0 $ 268,977 $ 24,215,667
============ ============ ============ =============
Investment and Mortgage-backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses and market
values of investment and mortgage-backed securities held to maturity are as
follows:
December 31, 1997
- -----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
US Government and
agency
Obligations $ 4,983,829 $ 25,992 $ 15,320 $ 4,994,501
Mortgage-backed
securities 4,500,445 72,993 5,098 4,568,340
------------ ------------ ------------ -------------
Total $ 9,484,274 $ 98,985 $ 20,418 $ 9,562,841
============ ============ ============ =============
11
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Security Federal Corporation and Subsidiary
Investment and Mortgage-backed Securities, Held to Maturity (continued)
- -----------------------------------------------------------
March 31, 1997
- --------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
US Government and
agency
obligations $ 7,978,201 $ 14,797 $ 163,799 $ 7,829,199
Mortgage-backed
securities 4,776,568 15,976 23,557 4,768,987
------------ ------------ ------------ -------------
Total $ 12,754,769 $ 30,773 $ 187,356 $ 12,598,186
============ ============ ============ =============
5. Deposits
A summary of deposit accounts by type with weighted average rates are as
follows:
December 31, 1997 March 31, 1997
----------------- --------------
Demand Accounts: Balance Rate Balance Rate
------- ---- ------- ----
Checking $ 44,290,908 1.31% $ 43,601,652 1.36%
Money Market 21,079,468 4.51% 11,640,884 2.80%
Regular Savings 11,875,337 2.48% 13,451,308 2.49%
------------- ---- ------------- ----
Total demand accounts $ 77,245,713 2.36% $ 68,693,844 1.83%
------------- ---- ------------- ----
Certificate Accounts:
0 - 4.99% $ 787,658 $ 3,935,588
5.00 - 6.99% 98,360,366 95,234,017
7.00 - 8.99% 135,042 197,409
------------- -------------
Total certificate accounts 99,283,066 5.50% 99,367,014 5.40%
------------- ---- ------------- ----
Total deposit accounts $ 176,528,779 4.13% $ 168,060,858 3.94%
============= ==== ============= ====
6. Federal Home Loan Bank Advances
Federal Home Loan Bank Advances are summarized by year of maturity and
weighted average interest rate in the table below:
Fiscal Year Due December 31, 1997 March 31, 1997
- --------------- ----------------- --------------
Balance Rate Balance Rate
------- ---- ------- ----
1998 $ 452,000 8.60% $ 11,952,000 5.88%
1999 21,180,000 5.82% 490,000 8.65%
2000 5,528,000 5.98% 528,000 8.70%
2001 856,000 8.75% 856,000 8.75%
thereafter 252,000 7.97% 288,000 7.97%
------------- ---- ------------- ----
$ 28,268,000 6.00% $ 14,114,000 6.30%
============= ---- ============== ----
12
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Security Federal Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. Regulatory Matters
The following table reconciles the Bank's stockholders' equity to its various
regulatory capital positions:
(Dollars in thousands)
December 31, 1997 March 31, 1997
----------------- --------------
Bank's Stockholders' Equity $ 16,886 $ 15,362
Unrealized loss (gain) on available
for sale securities, net of tax (48) 167
Reduction for goodwill and other
intangibles (2,162) (2,511)
----------- ---------
Tangible capital 14,676 13,018
Qualifying core deposits and
intangible assets 826 938
Core capital 15,502 13,956
Supplemental capital 1,727 1,627
----------- ---------
Risk-based capital $ 17,229 $ 15,583
=========== =========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at December 31, 1997.
(Dollars in thousands)
Amount Percent Actual Excess
Required Required Amount Percent Excess Percent
-------- -------- ------ ------- ------ -------
Tangible capital $ 3,339 1.5% $ 14,676 6.59% $11,337 5.09%
Core capital 6,702 3.0% 15,502 6.94% 8,800 3.94%
Risk-based capital 11,054 8.0% 17,229 12.47% 6,175 4.47%
The Bank's regulatory capital amounts and ratios are as follow as of the date
indicated:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 1997
Risk-based Capital $17,229 12.5% $11,054 8.0% $13,818 10.0%
(to risk weighted
assets)
Core Capital 15,502 6.9 6,702 3.0 13,404 6.0
(to adjusted
tangible assets)
Tangible Capital 14,676 6.6 3,339 1.5 11,129 5.0
(to tangible assets)
8. Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per Share,
which is effective for both interim and annual periods ending after December
15, 1997. This statement supersedes Accounting Principles Board Opinion No.
15, Earnings per Share. The purpose of this statement is to simplify current
reporting and make U.S. reporting comparable to international standards. The
statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures (as defined by the statement). The adoption of
this standard occurred with the filing of this 10-QSB.
13
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Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Changes in Financial Condition
Total assets of the Company increased $23.5 million or 11.6% during the nine
months ended December 31, 1997, primarily due to an increase of $30.0 million
in investment securities offset partially by a $6.3 million decrease in total
net loans receivable. Commercial business loans increased $1.8 million since
the beginning of the fiscal year, while residential real estate loans
decreased $4.8 million. The decrease in residential loans is due to the
relatively low interest rate environment, where most borrowers elect a fixed
rate loan, which the Bank immediately sells on the secondary market, as
opposed to an adjustable rate loan, which the Bank retains in its portfolio.
The increase in commercial business loans is part of management's strategy of
increasing small business loans, which now count as qualified investments for
the Qualified Thrift Lender test. Commercial business loans generally improve
the Bank's yield in its portfolio and reprice typically in one year or less,
but also inherently carry more credit risk than typical residential real
estate loans. The increase in investments during the period is part of the
Bank's asset liability strategy to utilize leverage and earn a spread on
investment yields over cost of borrowings and deposits.
During the fiscal year, both deposits and Federal Home Loan Bank (FHLB)
advances increased to fund the Bank's growth. Deposits increased $8.5 million
or 5.0% during the nine months ended of December 31, 1997, while FHLB advances
increased $14.2 million.
The Board of Directors declared the twenty-sixth, twenty-seventh and twenty-
eighth consecutive quarterly dividend of $.06 per share in May, August and
November 1997, which totaled $75,000. This represents a 20% increase in
dividends over last year. Unrealized net losses on securities available for
sale decreased $214,000 to a net gain of $48,000 during the nine months ended
December 31, 1997. Net income for the nine-month period was $1.3 million for
the Company. These items combined to increase the stockholders' equity by
$1.5 million or 9.3% during the nine months ended December 31, 1997. Book
value per share stood at $42.00 compared to $38.79 at March 31, 1997.
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision regulations, the Bank is
required to maintain a liquidity ratio at specified levels, which are subject
to change. Currently, a minimum of 4.0%, which was recently lowered from
5.0%, of the combined total of deposits and certain borrowings must be
maintained in the form of cash or eligible investments. A short-term
liquidity requirement was recently eliminated and the types of assets eligible
to be counted as liquid assets were also liberalized. The Bank's current
liquidity level is deemed adequate to meet the requirements of normal
operations, potential deposit outflows, and loan demand while still allowing
for optimal investment of funds and return on assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements are a primary use of the Bank's funds.
During the nine months ended December 31, 1997, loan repayments exceeded loan
disbursements resulting in a $6.3 million or 4.3% decrease in total net loan
receivable.
Deposits and other borrowings are also an important source of funds for the
Bank. During the nine months ended December 31, 1997, deposits increased $8.5
million while FHLB advances increased $14.2 million. At December 31, 1997,
Security Federal had $75.2 million of certificates of deposit maturing within
one year. Based on previous experience, a major portion of these certificates
will be renewed.
Capital resources at December 31, 1997 are sufficient to meet outstanding
mortgage loan commitments of $195,000 and unused lines of credit of $20.7
million. Management believes that the Bank's liquidity needs will continue to
be supported by the Bank's deposit base and borrowing capacity.
14
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Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Accounting and Reporting Changes
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which is effective for financial statements for
periods ending after December 15, 1997. This statement applies to both public
and nonpublic entities. The new statement requires no change for entities
subject to the existing requirements. The adoption of this standard did not
have a material effect on the Company.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display
the balance of other comprehensive income separately in the equity section of
a statement of financial position. Statement 130 is effective for both
interim and annual periods beginning after December 15, 1997. Earlier
application is permitted. Comparative financial statements provided for
earlier periods are required to be reclassified to reflect the provisions of
this statement. The Company will adopt Statement 130 effective March 31,
1998, and will provide the required disclosures in the Company's Form 10-QSB
and Annual Report.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement establishes standards for
the way public business companies are to report information about operating
segments in annual financial statements and requires those companies to report
selected information about operating segments in interim financial reports
issued to shareholders. Statement 131 is effective for financial statements
for periods beginning after December 15, 1997. Earlier application is
encouraged. In the initial year of application, comparative information for
earlier years is to be restated, unless it is impractical to do so. Statement
131 need not be applied to interim financial statements in the initial year of
its application, but comparative information for interim periods in the
initial year of application shall be reported in financial statements for
interim periods in the second year of application. It is not anticipated that
this standard will materially effect the Company's current method of financial
reporting.
In June of 1996 the FASB issued an exposure draft of a proposed statement,
Accounting for Derivatives and Similar Financial Instruments and for Hedging
Activities. In August 1997 the FASB distributed a draft of the standards
section of the final statement, together with related implementation guidance
and examples to members of the Financial Instruments Task Force and other
identified parties for comment on the draft's clarity and operationality.
Under the proposed standard, all derivatives would be measured at fair value
and recognized in the statement of financial position as assets or
liabilities. Although the final standard has not been issued, the FASB has
expressed publicly that a final statement would be effective for fiscal years
beginning after December 15, 1998. Because the Company has limited use of
derivative transactions at this time, management does not expect that this
standard, if adopted in its present proposed form, would have a significant
effect on the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
15
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Year 2000 Considerations
The Bank has begun to take steps to ensure that its core operating software
and hardware along with ancillary software packages are year 2000 compliant.
Letters have been sent to several vendors to ensure they are ready for the
year 2000. The Bank's main processing software and hardware vendors have
replied that they are year 2000 compliant in all material respects. Other
vendors are either compliant or say they will be complaint by the year 2000.
The Bank will continue to study this issue to ensure that all software will be
complaint in a timely manner. The Bank plans on testing its systems in the
latter part of calendar year 1998. The Bank does not anticipate that any
expenditures on year 2000 compliance or testing will be material.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31,
- -----------------------------------------------------------------------
1997 AND DECEMBER 31, 1996
- --------------------------
NET INCOME
Security Federal Corporation's net income increased $12,000 or 3%, to $469,000
for the three months ended December 31, 1997, compared to the same period in
1996 primarily due to an increase in net interest income and a decrease in
general and administrative expenses, offset almost entirely by an increase in
the provision for loan losses and a minor decrease in other income.
Net Interest Income
Net interest income increased $96,000 or 4.7% during the three months ended
December 31, 1997, compared to the same period in 1996 due primarily to an
increase in interest income on investments offset in part by a decrease in
interest income on loans receivable and an increase in interest expense.
Interest income on loans decreased $72,000 or 2.1% during the quarter due to
lower average total outstanding loan balances. Investment, mortgage-backed,
and other securities interest income increased $446,000 during the three
months ended December 31, 1997 compared to the same period one year ago due to
higher average investment balances and a higher yield on the overall
investment portfolio. Total interest income increased $375,000 or 9.4% during
the quarter.
Total interest expense increased $278,000 or 14.6% during the three month.
Interest expense on deposits increased $161,000 or 9.9% due to a higher cost
of funds on deposits due to the promotion of money market accounts and a
higher overall deposit balance during the quarter ended December 31, 1997.
Advances and other borrowings' interest expense increased $117,000 during the
three months ended December 31, 1997 compared to the same period in 1996 due
to a higher average outstanding borrowings total. The cost of advances and
other borrowings has been relatively stable during the past twelve months.
Provision for Loan Losses
Security Federal's provision for loan losses increased $165,000 to $240,000
for the three months ended December 31, 1997, compared to the 1996 period.
The increase in the provision expense is a result of management's analysis of
the loan portfolio and the increasing percentage of commercial loans, which
are inherently riskier than single family mortgage loans, in the Bank's
portfolio. Non-accrual loans at December 31, 1997 were $3.8 million compared
to $1.4 million at March 31, 1997. The growth in non-accrual loans occurred
due to two commercial loans totaling $1.1 million and several smaller loans
becoming 60 days or more past due. The Bank designates all loans 60 or more
days past due as non-accrual, while most institutions only consider loans 90
days or more
16
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
delinquent as non-accrual. The allowance for loan losses as a percentage of
total loans was 1.36% at December 31, 1997 and 1.19% at March 31, 1997.
Future additions to the Bank's allowance for loan losses are dependent on,
among other things, the performance of the Bank's loan portfolio, changes in
real estate values, interest rates, and the economy. A major employer in the
Aiken area, the Savannah River Site, has experienced major downsizings of
personnel the past few years. More layoffs at the site are expected in the
coming year, which could have some impact on the local economy. Bridgestone-
Firestone has begun construction of a tire manufacturing plant in the Aiken
area, which is projected to generate approximately 800 jobs in the next few
years. Management continues to monitor its loan portfolio for the impact of
local economic changes.
Other Income
Total other income increased $16,000 or 3.2% during the three ended December
31, 1997 compared to the same period one year earlier. The net gain on sale
of investments was $15,000 in the 1997 quarter, while there were no securities
sold in the 1996 quarter. Gain on sale of loans decreased $ 40,000 during the
1997 quarter. Loan servicing fees had a slight increase of $3,000 or 3.4%.
Service fees on deposit accounts increased $6,000 or 2.9% during the three
months ended December 31, 1997 compared to the three months ended December 31,
1996. Income from real estate operations decreased $23,000. Other income,
which consists of credit life insurance commissions, safe deposit rental
income, annuity and stock brokerage commissions through Security Financial
Services and other miscellaneous fees, increased $22,000 or 30.5% due to
increased activity in Security Financial during the December 1997 three month
period.
General and Administrative Expenses
General and administrative expenses decreased $83,000 or 4.7% due mainly to
decreases in FDIC insurance premiums and other expenses offset in part by
increases in compensation and benefits and advertising expense.
Compensation and employee benefits increased $75,000 or 9.5% due to normal
annual salary increases and the addition of two additional employees to
operate the Bank's in-house computer system, which was installed in late
January 1997. The computer conversion also changed the Bank from an
outsourcing of data processing services arrangement to an in-house processing
system which has the effect of increasing compensation and equipment expenses
slightly, but is more than offset by a decrease in other expenses. Occupancy
increased $14,000 during the December 1997 quarter due to an increase in
building maintenance and repairs expense. Advertising increased $30,000 to
$86,000 during the three months ended December 31, 1997 in order to market
money market accounts and increase consumer awareness of the Bank.
Depreciation and maintenance of equipment expense increased $17,000 during the
quarter due to the above mentioned computer conversion adding fixed assets in
the form of computer software and hardware. FDIC insurance premiums dropped
$47,000 due to the decrease in premium rates, which occurred in September 1996
due to congressional legislation to recapitalize the SAIF fund. Amortization
of intangibles arising due to branch acquisitions in October 1993, were
$116,000 in both the December 1996 and 1997 quarters. Other expenses,
encompassing legal, professional and consulting expense, stationary and office
supplies, and in the December 1996 quarter only, data processing outsourcing
expense, decreased $173,000 or 35.3% during the three months ended December
31, 1997. The primary reason for the decrease, is the above mentioned data
processing conversion which brought the Bank's data servicing back in-house
for which the Bank was paying approximately $30,000 per month to an outside
provider.
17
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------
COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1996
- ---------------------------------------------------
NET INCOME
Net income for the nine months ended December 31, 1997 increased $766,000 to
$1.3 million compared to one year ago, due primarily to a one-time charge
taken in the September 1996 quarter of $705,000 pre-tax, as a result of
legislation enacting a special assessment to capitalize the Federal Deposit
Insurance Corporation's Savings Association Insurance Fund (SAIF). Without
the one-time charge, net income would have risen by $328,000 or 33% for the
nine months ending December 31, 1997. This increase in operating earnings is
attributable to increases in net interest income and other income along with a
decrease in general and administrative expenses, offset in part by an increase
in the provision for loan losses.
Net Interest Income
Net interest income increased $506,000 or 8.4% for the nine months ended
December 31, 1997 compared to the same period in 1996 due mainly to increases
in investment interest income along with decreases in interest expense on both
deposits and borrowings offset partially by a decrease in interest income on
loans receivable.
Interest income on loans decreased $190,000 or 1.9% during the nine-month
period due to a decrease in loans outstanding. Investment, mortgage-backed,
and other securities interest income increased $593,000 or 32.6% during the
nine months ended December 31, 1997 compared to one year ago, due to an
increase in investment balances and an increase in the overall yield in the
investment portfolio. Total interest income increased $403,000 or 3.4% during
the period.
Total interest expense decreased $103,000 or 1.7% during the nine month period
ended December 31, 1997 in contrast to that same period in 1996. Interest
expense on deposits decreased $84,000 or 1.7% while interest expense on
advances and other borrowings decreased $19,000 or 2.0% during this period.
Provision for Loan Losses
The provision expense during the nine months ended December 31, 1997
increased $405,000 due to an increase in non-accrual loans and net
charge-offs. During the nine months ended December 31, 1997, net charge-offs
were $476,000 compared to $239,000 for the nine months ended December 31,
1996. Management continues to analyze its loan portfolio for trends and
considers the effect of the local and national economy in estimating its
allowance for loan loss adequacy.
Other income
Total other income increased $333,000 or 29% for the nine months ended
December 31, 1997 compared to the same period in 1996. The net gain on sale
of investments was $15,000 in 1997, while there were no investment sales in
the 1996 period. Gain on sale of loans decreased $13,000 or 7.8% while loan
servicing fees increased $8,000 or 3.3% during the nine months ending December
31, 1997. Service fees on deposit accounts increased $51,000 or 8.4% due to
an increase in the number of demand deposits. Income from real estate
operations increased $68,000 due to a $100,000 provision expense on the value
of real estate acquired for development recognized in the September 1996
quarter. Other income, which encompasses credit life insurance, safe deposit
box rental, gain on sale of repossessed assets, annuity and stock brokerage
commissions through Security Financial Services and other miscellaneous fees,
increased $203,000 during the nine months ended December 31, 1997. This
increase is
18
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Management's Discussion and Analysis of
Results of Operations and Financial Condition
attributable to an increase in customers' usage of Security Financial Services
and an increase in the gain on sale of repossessed real estate.
General and Administrative Expenses
General and administrative expenses decreased $766,000 during the nine months
December 31, 1997 due to the one-time pre-tax charge of $705,000 for the FDIC
SAIF special assessment recognized in September 1996. Without this charge,
general and administrative expenses would have decreased $61,000 or 11.2%
during the nine month period.
Compensation and employee benefits increased $175,000 or 7.2% during the
period due to normal annual salary increases and increased head count due to
bringing data processing in-house. The Bank, previous to February 1997,
out-sourced data processing and paid approximately $30,000 per month for that
service. Data processing expense was categorized in other expenses, which
decreased $313,000 during the nine months ending December 31, 1997. This
decrease was due to the elimination of the outsourcing contract and a decrease
in repossessed assets expense. Occupancy expense increased $52,000 or 17.0%
during the period due to office remodeling, which occurred in October 1996.
Advertising expense increased $125,000 due to increased media advertising and
the utilization of billboard advertising. Depreciation and maintenance of
equipment increased $66,000 or 13.6% during the nine months ended December 31,
1997 due to the previously mentioned computer conversion, which added
equipment and software to the Bank's fixed assets. FDIC insurance premiums
dropped $166,000 during the period due to the FDIC SAIF recapitalization.
Amortization of intangible expense remained constant at $349,000 for both nine
month periods.
19
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Bank is a party to
legal proceedings in the ordinary course of business wherein it
enforces its security interest in mortgage loans it has made.
Item 2 Changes in Securities
---------------------
Not applicable.
Item 3 Defaults upon Senior Securities
-------------------------------
None
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 27 Financial Data Schedule
No reports on Form 8-K were filed during the period under report.
20
<PAGE>
<PAGE>
Security Federal Corporation and Subsidiary
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
Security Federal Corporation
Date: February 13, 1998 By: /s/ Roy G. Lindburg
----------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
21
<PAGE>
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